On Wall Street's annual recruiters panel is thrilled about the possibilities, expecting lucrative packages will appear on the horizon for advisors from leading firms where wealth management drives the biggest profits.
Paydays, the panel says, await both solo practitioners and mega teams with high production levels and significant client assets.
"Deals are at an all-time high, and many advisors are experiencing FOMO … Fear Of Missing Out," says recruiter Bill Willis.
However, our panelists warn there are pitfalls to avoid, and firms to watch out for. Many of the deals they expect will be designed to grab young, successful producers who can replace advisors who are aging and ready to retire. "One-third of all the reps supposedly will retire in about 10 years; 43% of the brokers in our industry are over 55 years old," says recruiter Rich Schwarzkopf. "The demographics aren't going to change."
While there may not be many offers for low producers and advisors overseeing small levels of client assets, the recruiters say there are opportunities in joining smaller firms or doing as others have done: go independent.
"I think, for the discerning advisor who wants to fix something, whether it's the financial stability in his or her own account [or the desire to open] their own business, there's never been more options and more opportunities," says recruiter Danny Sarch.
On Wall Street's Q&A with the panelists includes their insights on which firms are facing headwinds, which are on the hunt for new talent, and what advisors can look for in potential deals.
"I'm bullish on being an advisor. It's a really exciting time," says recruiter Mindy Diamond of Diamond Consultants.
OWS: What firms have been the most aggressive about recruiting, and how competitive will their offers be for advisor recruits as the rest of 2016 unfolds?
BILL WILLIS: Well, the deals were at record highs last year, and the most aggressive in pure dollar amounts were Merrill Lynch, Morgan Stanley and UBS. And UBS got particularly aggressive at year-end, where they printed some 175% upfront deals [of their trailing 12-month commission].
Looking at the independent space, FiNet, the independent branch of Wells Fargo, was easily the most aggressive financially.
I don't see any letup this year. I anticipate the deals will remain as strong, or stronger, and that's because of supply and demand. All these firms want to grow, and yet they're training very few people. So if you want to grow, you're going to have to take people from the competition.
MICHAEL KING: Most aggressive? I think I would say UBS was the most aggressive this past year.
Merrill is doing [a lot of recruiting, too] because of deferred comp. That's just drawing people in.
RICK PETERSON: I have to put Ameriprise right up there near the top. It's a firm that 10 years ago I don't think anybody here had ever heard of. Last year alone, they recruited 350 brokers.
The second firm I'd have to put in terms of aggressiveness is Raymond James, and I think everybody loves Raymond. That firm just sells itself over and over again. They sell themselves as being the alternative to Wall Street. And I think they do a very effective job at that.
The third firm, of course, I'd have to put up there is UBS — the aggressiveness that came out, especially in the fourth quarter last year. We looked at UBS for years asking, "Could they make it with only 7,000 brokers? Is it a unique niche, or are they just under-brokered, and do they have the wherewithal to stay within the industry?"
They've been aggressive, and they continue to be aggressive with the right types of brokers. They've increased the average productivity per broker to be the highest now in the country.
Also, look at what UBS did with the Credit Suisse brokers in the fourth quarter, and they got a large number of them because of their aggressiveness.
OWS: What's your take on deals firms will be offering advisors?
DANNY SARCH: Everybody in this room has been doing this for a long time, and as we hit a given number, it seems like everybody says, "Oh, it'll never go higher," and then it always does.
[But] I think there are ebbs and flows along the way. I think that the firms have taken a slight step back from the very peaks. The exception goes for when there's a massive opportunity, à la Credit Suisse or Barclays, which happened during 2015.
At the same time, we have more and more advisors retiring. So, you know that, with the supply and demand model, inevitably the price of playing has to go up.
MICKEY WASSERMAN: Every year, I've predicted that the deals are going to go down, and I've been wrong every year. They just seem to skyrocket.
There may be some creative changes, however, on the back end of deals. Back ends you can manipulate so that they're a little bit more attractive to incoming advisors. The back-end hurdles might be raised or lowered depending upon a firm's objectives. Back-end hurdles may slide closer toward the beginning of a contract or toward the end. There's so many things that can be done with the back end. The front end is far more delicate. At 175%, I don't see them going much higher than that.
When a firm changes the upfront portion of an offer, there's usually dissension in existing ranks, because they're looking at all these people coming in making fortunes, and they've been loyal for 20 or 30 years and they're saying, "What are they doing with us?" So firms have to be very careful and very creative.
RICH SCHWARZKOPF: You would think with all these enormous transition packages that there'd be a line wrapped around the block to get into every wirehouse, but there isn't. The wirehouses are losing brokers almost every year.
In the past seven years, they've lost 20% to 25% of their brokers. I talk to brokers really unhappy about most of the big wirehouse firms. You see a lot of the biggest asset groups in the country now, they're going to the RIA field, not to the wirehouses.
KING: Deferred comp is going to be a big issue this year. Merrill, for the right broker, covers the entire deferred comp. Morgan Stanley covers about up to 30% usually. UBS has just begun to do that, and Wells makes it part of their deal.
There's also the 175% upfront that UBS offered. I believe they're extending the contract more than nine years. That may be the way they go this year. But I think brokers these days are — because they're total crazies — asking for 200% guaranteed coming in the door.
MINDY DIAMOND: What advisors want more than anything is freedom, flexibility and control. The more a firm's value proposition offers freedom, flexibility and control, the less of a deal they have to offer. When we talk about firms like Raymond James being aggressive in recruiting, they certainly are, but their deals don't match the wirehouse deals and don't need to, because their whole model is all about advisors owning their book of business, and more freedom.
PETERSON: Firms say that their deals are the most that they'll ever offer, but all it really takes to violate that is to have another player come into the bidding.
Now, there are all sorts of ways to change a deal structure without necessarily changing the upfront portion: a lot of the back-end things that they can give away, which is tough to put a dollar amount to, like parking spots and funding in the transition packages, giving them extra travel and entertainment dollars.
OWS: What types of recruiting packages will most effectively attract young advisors? Which ones will attract the older ones?
MARK ELZWEIG: Young advisors are growing, so they need recruiting packages that are going to reward their growth. Therefore, a recruiting package should have back-end bonuses built into it so advisors can be rewarded as their production ascends. Also, young advisors, if possible, like to be paired up with an advisor who's nearing retirement, whose book they can acquire. That's a tremendous carrot.
Older advisors are more interested in flexibility. It's been very popular the past few years, the getting-paid-twice strategy amongst the 50-plus set, where you get a recruiting deal to join and then later you make another deal when you sunset your book. Not all of the older advisors want to sign deals for nine or 10 years [either]. So they need one short-term transition deal.
Also, when they do transition their book, they need to have a variety of options in terms of potential successors, so they can match themselves up with someone who has the right business model, someone where there's a good personality fit, who has confidence from a character standpoint.
WILLIS: Younger advisors. Are there any? It's sort of the lost generation. We don't run into too many people who are deal-ready that would be considered young in the business, but for those who are in that position, they want a big deal, as big as can possibly be, with an accent on growth. But what they want is to inherit a book.
I think one of the biggest challenges facing the industry right now is how to capture the older advisors. Are they going to take the sunset deals the firms offer, or are they going to do one last move, one last dance? I repeatedly hear, "I'd like to move. I feel great now, I want to work, but 10 years is a long time for me. I'm 66 years old and I feel great now, but what about four years [from now?] I don't want to have a note in four years."
The firms that are smart right now will develop a program where the advisor comes aboard, gets bolted onto a team and, at his or her discretion, can leave. The team takes the assets and the advisor continues to have a number there; maybe they give him or her some small title. It keeps them from competing elsewhere, and they journal enough production into that number to cover the taxation on the note.
OWS: Is teaming providing more opportunities for young advisors? Or is it just shutting the door on smaller producers?
WASSERMAN: Low production shuts the door on low producers. Teaming is an opportunity. [If] a young advisor comes into a team, they can achieve greatness. There's not really much room for a solo practitioner coming in and building his book. It has to go the way of teams, and as far as production is concerned, Ed Jones is probably the last bastion of appreciating what somebody sub-175 can do. The desk space is very, very valuable. When firms have to invest in technology, infrastructure, compliance costs — especially compliance, which is coming more and more — there's no room for a small producer.
ELIZABETH McCOURT: Teaming is an essential part of where the business is going. I think the most important thing with teams is to really set forth a platform where you can leverage the talents of each team member. That might be what's lacking in the formulation of teams. You can't just say, "Here's a new junior advisor. Hook up with this team." It's actually part of a marriage that they have to work together and leverage each other's talents. So I think having a program to assess talents and get people to work together can be beneficial for both the younger and the older advisor.
SARCH: Look, teaming has been obviously around on the Street for a long, long time, and there's a client-facing benefit with teams that actually work well together. But when it's bad, it's like a bad marriage. Some can break up terribly.
ELZWEIG: Teaming is the only way to get into the business. If you're a new advisor, you're eventually going to have to have at least $20 [million] to $25 million just to have a sustainable practice, and one thing joining a team does, it gives you a two-year salary to build, and it's going to take a lot of time to build that kind of business. You also get the guidance of experienced advisors on how to build your practice.
However, having said that, there's also an underside to teaming. Sometimes, when people are lower producers, firms essentially force them to join teams to make sure that a senior advisor who's less likely to move will be able to grab their assets and keep them at the firm.
STEVE ROSEN: I think that, if the firms are trying to squeeze out lower-end producers, there's a much easier way to do it, which they've already done, and that's cut their pay. But I think the point of teaming is more on the pro side.
First of all, firms used to hire young kids who were talented or aggressive. But that business model's completely changed because the failure rate for young people has gotten so high. The firms are now looking for more-mature adults who are in their second or third career.
Competing for the big money these days, you need to be part of a team, because you have specialists on that team: a fixed-income specialist, a 401(k) specialist, equity specialist, so on and so forth.
There are major advantages for a young advisor to join a team, including guidance, expertise and support. These are things you don't learn in a training program or in college. Also, a young advisor who hooks up with a good team and stays around is going to eventually inherit part or all of that business. That's something that gets overlooked.
Of course, the downside is teaming is good for the firms, because if one team member wants to leave, odds are they're going to struggle taking their book from the firm.
Another thing is that bigger teams are going to get resources. Someone who's solo who doesn't have a big business is going to find themselves waiting second and third in line.
DIAMOND: Teaming is a wonderful way for a young person to join the business and get mentored, as long as it's the right team and, most importantly, as long as it is structured in the right way. We've worked with a lot of young advisors that joined a team. It was a great way to grow, but a few years in, they sort of found themselves more like an indentured servant.
Key for a young advisor joining a team is to have his own production number. He's building his own book of business, so that, if at some point he wants to go off on his own, he actually has something that he owns and is his alone.
OWS: Which firm will have the hardest time retaining brokers in 2016?
PETERSON: Firms where the retention packages have worn off — the packages from 2008. They are either wearing off and did wear off in 2015, or they're coming off this year and next year. Those firms are especially at risk if they did not give financial rewards to brokers while they were under the retention plans, didn't invest in their businesses, lowered payouts, increased productivity requirements. If they did any of those things, they did not endear themselves to those brokers.
SCHWARZKOPF: Of the regional firms, I think Oppenheimer will be sold. The headcount is down 20% in two years. The larger regionals like Stifel just keep buying up firms that are having problems.
ELZWEIG: I think the wirehouse that will lose the most people is Morgan Stanley. That's essentially because there's still a lot of anger at the way part of the cash grid was moved over into long-term deferred comp. That's 1.5% to about 2% of an advisor's gross. I also think, particularly with the old Smith Barney brokers, they had a special affinity for Jamie Diamond and even for Sandy Weill. That's a hard act to follow. They don't feel the same way about the current Morgan Stanley management.
OWS: Which firms will be under the most stress in 2016 and why?
DIAMOND: What is really important to most top advisors has nothing to do with money, but a feeling of being appreciated, of being invested in, of being treated as one of the tops in the firm.
The models that I think are in most in danger are the big firms who look at advisors as a commodity. It doesn't take the size of a recruiting deal to retain a top advisor. What it takes is making them feel wanted, important and to give them the freedom and flexibility that they want.
KING: Oppenheimer clearly is in trouble. I think they will be sold. I think the old Oppenheimer brokers, not the older people but the original Oppenheimer people, are the most valuable, and they're very much sought after. The old people will go into a smaller firm or regional firm. The major firms like Wells Fargo will not want them.
Merrill's going to be under pressure because the [retention] deals are over. A lot of brokers still don't like the Bank of America situation. I think Morgan's under pressure for the Smith Barney situation, for them being almost too big.
ROSEN: I respectfully disagree with what was said about Morgan Stanley being at risk. The unhappy Smith Barney brokers have already departed for the most part.
The firm that really needs to watch its back is Bank of America. Merrill Lynch was, if not the best, arguably one of the best firms on the Street. The bottom line, to keep it short, is that banks and brokerages don't mix. They're oil and water; they're cats and dogs. Bank of America's not even hiding it. They're flat-out saying that they want to impose their banking will and their banking model onto the advisors. I think it's just a matter of time before they start bleeding.
OWS: Which foreign firm will be the next to pull out of the U.S. wealth management business?
WILLIS: After Barclays, Deutsche Bank and Credit Suisse are no longer, there really are just two foreign firms of any significance on the map, and that's RBC and UBS.
UBS was in talks with Morgan Stanley, but a deal wasn't done. Now UBS is acting like a firm that's not for sale and one that wants to get bigger. They got very aggressive, as we know, with Credit Suisse. So I think they're more a buyer than a seller.
RBC bought City National Bank out in Los Angeles, and in the process, the gentleman who ran City National is now running RBC retail. So I don't think they're a seller.
PETERSON: We agree that the only two firms left are UBS and RBC, and we don't see them exiting the U.S. market. But the U.S. market, being as viable as it is and arguably the wealthiest market in the world, I think the better question is: What foreign banks do we see entering the U.S. market? And I think the answer might be firms like Royal Bank of Scotland (RBS), Canadian Imperial Bank (CIBC). Hong Kong and Shanghai Bank (HSBC), which I've loved for years, also might. Toronto-Dominion Bank (TD) is another strong Canadian bank that might come in. Not even mentioning a Middle Eastern bank, out of Dubai for example.
And I do think, eventually, we're going to see a re-emergence of some of those firms that just exited, like Credit Suisse, Deutsche or Barclays in some other fashion.
SARCH: The lessons these firms that have exited have taught us is that, if wealth management is not your core business, then it's a risk. And the firms that exited, it was just a small piece of their business. The ones who have stayed have made it a very important piece.
OWS: Where do advisors in the absence of these boutiques find a similar work experience?
DIAMOND: I think one to watch is Raymond James' purchase of Deutsche Bank. ... You get the strength of the Alex Brown name with the Deutsche Bank platform [and] the stability of Raymond James. But generally speaking, if an advisor wants a boutique organization, they're either creating their own by way of going independent and building a multifamily office, or they're joining any one of these new quasi-independent firms: William Blair, Snowden Lane, Stewart Partners. Cantor Fitzgerald Wealth Partners and Robertson Stephens.
ROSEN: Another option is going into private wealth at a firm like Morgan Stanley or Bank of America. It's a firm within a firm.
ELZWEIG: Raymond James has been one of the great beneficiaries of people who want boutiques now that the universe has shrunk. They recruited something like $6.5 billion in assets in the fourth quarter. I also saw that J.P. Morgan made some very impressive hires from both Barclays and Credit Suisse. I would also agree with Mindy's point that there are high-end teams looking for new models in the independent channel.
KING: Wealth management groups and the big firms are a very good option for them. You have small groups within a big firm with special supports for big producers. Also, Raymond James is the hot button this year. How long that will last, we don't know, but they have a great culture.
OWS: How is increasing regulation impacting recruiting?
ELZWEIG: We know that commission business will be more difficult. We also know that, as a result, wealth management will be less profitable. Firms are not going to be as interested in hiring commission-based advisors.
I will also say that the independent channel will probably shrink. The smaller firms that are marginally profitable are not going to have the money to comply with a fiduciary standard, so there will be less choices. In the independent channel, the 90% payout — which right now seems to be like a God-given right for most independent brokers — that's going to be reserved for larger producers. I think the changes will be very dramatic.
MCCOURT: I think it's definitely going to affect recruiting because the Department of Labor says its rule is going to affect retirement 401(k) accounts and $19 billion in revenue for financial advisors. Firms well-positioned to handle this kind of regulation are the ones [that are] actually going to be using that very fact for recruiting.
SCHWARZKOPF: The main impact will be on the insurance industry, because what they're going after are variable annuities and non-traded REITs. I don't think it'll affect the securities business ... very much at all. It's going to affect independent firms who deal in non-traded REITs, and the insurance industry with the variable annuities.
OWS: What is the state of independence?
DIAMOND: It's where the puck is heading. What creates such a seller's market today with advisors in the driver's seat? So many different versions of independent. So depending upon how entrepreneurial you want to be, how much control you want, how much money you need upfront, how alone you want to be and how much support you need, chances are there are one of several options that can be right for you.
SARCH: I think that it really has become like Baskin-Robbins in [that] there's so many different flavors, and for the top advisors you really can hand pick what your main points are and what you want to fix.
You can find the perfect thing that will be a fit for you and your clients.